25 Markers Essay Plans Flashcards
(4 cards)
Causes of Market failure (PE)
One cause of market failure can be positive externalities. This is when goods/services give benefit to a third party, the social benefit will exceed the private benefit. For example positive externalities of consumption in flu vaccinations offered for free in the UK will not only reduce the consumers risk of illness but reduce the spread of flu to others in society. In the diagram (Figure 1), the Marginal social benefit (MSB) curve lies above the marginal private benefit (MPB) so external benefits are to those not involved in the transaction, showing that at the free market equilibrium (Q1), the good is under-consumed relative to the socially optimal level (Q2). The area between MSB and MPB up to Q2 represents a deadweight welfare loss, indicating a misallocation of resources. However, in a free market, the issue of market failure can arrive from self interest without government intervention. A few individual consumers may take for granted the benefits of having a flu vaccine for others in society if they have distrust of the vaccine’s effectiveness or believe others having it provides sufficient protection (free riding). However, to address this market failure, the Government often intervenes with subsidies or providing vaccines for free for those under 18, shifting market closer to the social optimum due to increasing the availability of vaccinations to all households therefore benefitting society as a whole. This depends on individuals though, as some individuals may still refuse to have the vaccine, resulting in wasted public funds. Government spending on making vaccines available to all may not be feasible in the long-run as it puts a strain on public finances if there is loss, therefore pushing the government to privatise the issuing of vaccines, leading to inequitable access. This could increase the risk of disease amongst lower income communities. If the government intervention is to be carefully monitored through the use of campaigns to raise awareness of the positives of consumption, it could reduce inefficiency and increase welfare benefits as long as those campaigns are to be effective in increasing the consumption of vaccines and successfully allocating resources.
Causes of market failure (NE)
In addition, another cause of market failure can be negative externalities. This is when goods/services are of detriment to a third party, the private benefit will exceed the social benefit. A strong example of a negative externality of consumption would be smoking as it causes bystanders to breathe in secondary smoke, increasing their risk of respiratory related diseases. In the diagram (Figure 2), the marginal private benefit (MPB) curve lies greater than the marginal social benefit (MSB), so the external cost are those not involved in the transaction, showing that at the free market equilibrium (Q1), the good is over-consumed relative to the private optimal level (Q2). The area above the MPB past Q2 signifies the deadweight welfare loss, indicating a misallocation of resources. Similarly to positive externalities, market failure can arrive from self interest without government intervention. Those who smoke for example (the consumers) may have become addicted to it, so will only be interested in smoking to sustain their addiction rather than be concerned for other people’s health. However, to address this market failure, the government can intervene with specific taxes or laws, shifting the market closer to the social optimum due to decreasing the availability of harmful goods such as cigarettes, specifically with taxes increasing costs and reducing consumption. This depends on whether laws such as a ban of buying cigarettes until 18 would prohibit the purchasing and using of these substances. For example, government failure can arise if these laws cause black markets to be created. This is when illegal markets will continue purchasing and selling these harmful goods, therefore contradicting the purpose of laws as most likely the number of bystanders affected by smoke would remain similar. If government intervention is to be carefully monitored, however, by worsening the consequences of black markets or increasing the moderation taken through imports/exports of goods and services then the continuation of the goods harming society could be minimised. Alternative policies could also be introduced such as education campaigns to reduce the number of smokers within society. However, this depends on the effectiveness of whether criminals listen to the consequences of law or whether any criminal activity including law enforcement such as police turning a blind eye to the selling of cigarettes to those underage, takes place to maintain the flow in the market.
Causes of Market failure (MP)
Furthermore, a cause of market failure can be a monopoly power. This occurs when one firm dominates the market with more than 25% market share. Monopolies can cause market failure as illustrated in Figure 3, where higher prices, increased profits and inefficiency may result in the misallocation of resources compared to the outcome in a competitive market. Due to market dominance, Monopolies also have the power to exploit the consumer by charging them higher prices, this means the goods is under-consumed, so consumers need and wants are not fully met - this loss of allocative efficiency is a form of market failure. However, to address this market failure, Governments can implement new laws such as the Competition Act in 1998 which investigated the abuse of monopoly power and acted against firms who are found guilty of abusing monopoly power. If the powers are found to be guilty, OFT can fine firms 10% of annual turnover if they are abusing market power. This depends whether monopoly powers find these laws a barrier to try to abuse power or whether the use of criminal activity could make a monopoly work around such laws. There could also be unintended consequences as a result of these laws as heavy monitoring can increase costs for both firms and the regulator, which passes costs onto consumers in higher prices or lower quality service, therefore becoming a burden on the market. If this government intervention is carefully monitored, however, by making sure the activity of monopoly powers is closely controlled and checked often, then such laws could prohibit monopolies from reducing consumer surplus’ by raising prices higher than necessary to achieve maximum profit and rather force monopolies to sell as reasonable prices that allocate resources effectively and do to constrict both consumers and producers.
Causes of market failure (PG)
A final cause of market failure can be public goods. Public goods are those that are non-excludable and non-rival. An example of this would be a street lighting, as anyone can benefit by walking beneath it. The issue is that public goods are often not provided in a free market as firms have no incentive to provide them since they cannot charge users effectively. As a result, these goods are often under-provided or not provided at all in a free market, leading to market failure. The reason for their lack of being produced is due to the free rider problem. If firms were to charge money for people walking beneath street lights, others may wait until someone else has paid for the light before they walk beneath it. In addition, consumers as a whole may refuse to use the good/service (in this case street lighting) as they do not believe it is worth paying for, with no demand for the product, street lighting would become a complete market failure. To tackle this market failure, the use of street lighting as a quasi-public good could allow some private provision to be possible. This can be done by increasing taxes on households in order to cover the cost of street lighting and to prevent the free rider issue. However, while this solves the provision issues, it creates an opportunity cost as the money spent on the public good could have been used elsewhere (e.g. healthcare or education).
